SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________TO___________
Commission file number 000-25306
EQUUS GAMING COMPANY L.P.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 52-1846102
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 Munoz Rivera Avenue
Doral Building, 7th Floor
Hato Rey, PR 00918
-----------------------------------------------------
(Address of Principal Executive Offices and Zip Code)
(787) 753-0676
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 8,389,824 Class A Units
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<CAPTION>
EQUUS GAMING COMPANY L.P.
FORM 10 Q
INDEX
PAGE
PART I - FINANCIAL INFORMATION NUMBER
<S> <C>
Item 1 - Consolidated Financial Statements
Consolidated Statements of Loss for the Nine Months
Ended September 30, 1999 and 1998 (Unaudited) 3
Consolidated Statements of Loss for the Three Months Ended
September 30, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Comprehensive Loss for the Three and
the Nine Months Ended September 30, 1999 and 1998 (Unaudited) 5
Consolidated Balance Sheets at September 30, 1999 (Unaudited)
and December 31, 1998 (Audited) 6
Consolidated Statement of Changes in Partners' Deficit for the
Nine Months Ended September 30, 1999 (Unaudited) 8
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 (Unaudited) 9
Notes to Consolidated Financial Statements 11
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations 17
Liquidity and Capital Resources 19
Item 3 - Quantitative and Qualitative Disclosure About Market Risk 23
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 23
Item 2 - Material Modifications of Rights of Registrant's Securities 23
Item 3 - Default upon Senior Securities 23
Item 4 - Submission of Matters to a Vote of Security Holders 23
Item 5 - Other Information 23
Item 6 - Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
2
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<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Commissions on wagering . . . . . . . . . $49,594,091 $44,371,528
Net revenues from lottery services. . . . 451,529 742,366
Other revenues. . . . . . . . . . . . . . 2,889,234 3,015,508
------------ ------------
52,934,854 48,129,402
------------ ------------
EXPENSES:
Payments to horseowners . . . . . . . . . 24,366,335 21,860,903
Salaries, wages and employee benefits . . 8,407,488 8,459,887
Operating expenses. . . . . . . . . . . . 6,296,327 6,702,628
General and administrative. . . . . . . . 2,660,922 1,796,349
Marketing, television and satellite costs 3,208,836 2,769,058
Financial expenses. . . . . . . . . . . . 6,302,269 6,749,252
Depreciation and amortization . . . . . . 2,705,121 2,789,728
------------ ------------
53,947,298 51,127,805
------------ ------------
LOSS BEFORE INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY ITEM . . . . . (1,012,444) (2,998,403)
PROVISION FOR INCOME TAXES. . . . . . . . . 53,872 -
------------ ------------
LOSS BEFORE MINORITY INTEREST AND
EXTRAORDINARY ITEM . . . . . . . . . . . . (1,066,316) (2,998,403)
MINORITY INTEREST IN LOSSES . . . . . . . . (705,701) (27,321)
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM. . . . . . . (360,615) (2,971,082)
EXTRAORDINARY ITEM - discount on early
redemption of First Mortgage Notes. . . . 22,680 -
------------ ------------
NET LOSS. . . . . . . . . . . . . . . . . . $ (337,935) $(2,971,082)
============ ============
ALLOCATION OF NET LOSS:
General Partner . . . . . . . . . . . . . $ (3,379) (29,711)
Limited Partners. . . . . . . . . . . . . (334,556) (2,941,371)
------------ ------------
$ (337,935) $(2,971,082)
============ ============
BASIC AND DILUTED PER UNIT NET LOSS . . . . $ (0.04) $ (0.47)
============ ============
WEIGHTED AVERAGE UNITS OUTSTANDING. . . . . 7,579,290 6,333,617
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF LOSS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Commissions on wagering. . . . . . . . . . $16,239,090 $13,198,149
Net revenues from lottery services . . . . 185,991 120,410
Other revenues . . . . . . . . . . . . . . 832,970 1,307,604
------------ ------------
17,258,051 14,626,163
------------ ------------
OPERATING EXPENSES:
Payments to horse owners . . . . . . . . . 7,940,482 6,646,898
Salaries, wages and employee benefits. . . 2,933,588 2,861,418
Operating expenses . . . . . . . . . . . . 2,342,932 2,188,225
General and administrative . . . . . . . . 886,263 625,291
Marketing and satellite transmission costs 996,338 835,735
Financial expenses . . . . . . . . . . . . 2,154,667 2,299,662
Depreciation and amortization. . . . . . . 982,834 966,735
------------ ------------
18,237,104 16,423,964
------------ ------------
LOSS BEFORE INCOME TAXES AND MINORITY
INTEREST. . . . . . . . . . . . . . . . . (979,053) (1,797,801)
INCOME TAX BENEFIT. . . . . . . . . . . . . (276,042) -
------------ ------------
LOSS BEFORE MINORITY INTEREST. . . . . . . . (703,011) (1,797,801)
MINORITY INTEREST IN LOSSES. . . . . . . . . (274,996) (18,400)
------------ ------------
NET LOSS . . . . . . . . . . . . . . . . . . $ (428,015) $(1,779,401)
============ ============
ALLOCATION OF NET LOSS:
General Partner. . . . . . . . . . . . . . $ (4,280) $ (17,794)
Limited Partners . . . . . . . . . . . . . (423,735) 1,761,607)
------------ ------------
$ (428,015) $(1,779,401)
------------ ------------
BASIC AND DILUTED NET LOSS PER UNIT. . . . . $ (0.05) $ (0.28)
============ ============
WEIGHTED AVERAGE UNITS OUTSTANDING . . . . . 8,439,824 6,333,617
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE NINE AND THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 1998
------------ ------------
<S> <C> <C>
NET LOSS . . . . . . . . . . . . . . . $ (337,935) $(2,971,082)
OTHER COMPREHENSIVE LOSS:
Currency translation adjustments . . . (736,253) (40,470)
------------ ------------
COMPREHENSIVE LOSS . . . . . . . . . . . $(1,074,188) $(3,011,552)
============ ============
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
NET LOSS . . . . . . . . . . . . . . . $ (428,015) $(1,779,401)
OTHER COMPREHENSIVE LOSS:
Currency translation adjustments . . . (867,014) (1,809)
------------ ------------
COMPREHENSIVE LOSS . . . . . . . . . . . $(1,295,029) $(1,781,210)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Unrestricted. . . . . . . . . . . . . . . . . . . . . . $ 1,097,000 $ 6,462,992
Restricted. . . . . . . . . . . . . . . . . . . . . . . 1,399,165 174,275
--------------- --------------
2,496,165 6,637,267
--------------- --------------
PROPERTY AND EQUIPMENT:
Land. . . . . . . . . . . . . . . . . . . . . . . . . . 7,748,617 7,128,858
Buildings and improvements. . . . . . . . . . . . . . . 55,092,389 44,615,936
Equipment . . . . . . . . . . . . . . . . . . . . . . . 13,096,110 10,924,669
--------------- --------------
75,937,116 62,669,463
Less - accumulated depreciation . . . . . . . . . . . . (17,525,437) (15,199,341)
--------------- --------------
58,411,679 47,470,122
--------------- --------------
DEFERRED COSTS, NET:
Financing . . . . . . . . . . . . . . . . . . . . . . . 2,591,042 3,075,706
Costs of Panama contract. . . . . . . . . . . . . . . . 2,007,500 2,090,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . 541,414 209,852
--------------- --------------
5,139,956 5,375,558
--------------- --------------
OTHER ASSETS:
Accounts receivable, net. . . . . . . . . . . . . . . . 1,050,907 1,160,468
Notes receivable. . . . . . . . . . . . . . . . . . . . 1,143,063 1,708,211
Investment in Equus Comuneros S.A.("SECSA"), see Note 1 - 950,000
Prepayments and other assets. . . . . . . . . . . . . . 1,146,541 737,580
--------------- --------------
3,340,511 4,556,259
--------------- --------------
$ 69,388,311 $ 64,039,206
=============== ==============
</TABLE>
(continues)
6
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND PARTNERS' DEFICIT
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
FIRST MORTGAGE NOTES:
Principal, net of note discount of $932,725 and $1,068,540. $ 53,521,275 $ 56,194,460
Accrued interest. . . . . . . . . . . . . . . . . . . . . . 1,855,679 317,069
--------------- --------------
55,376,954 56,511,529
--------------- --------------
OTHER LIABILITIES:
Accounts payable and accrued liabilities. . . . . . . . . . 8,911,197 8,088,343
Outstanding winning tickets and refunds . . . . . . . . . . 2,009,326 519,484
Notes payable . . . . . . . . . . . . . . . . . . . . . . . 2,825,245 2,841,797
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . 4,000,000 4,000,000
Capital lease obligations . . . . . . . . . . . . . . . . . 3,000,549 2,249,076
--------------- --------------
20,746,317 17,698,700
--------------- --------------
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . 2,682,411 2,628,539
--------------- --------------
MINORITY INTEREST . . . . . . . . . . . . . . . . . . . . . . 2,798,567 1,266,849
--------------- --------------
PARTNERS' DEFICIT:
General Partner . . . . . . . . . . . . . . . . . . . . . . (756,186) (745,444)
Limited Partners - 10,383,617 units authorized;
8,389,824 and 5,398,060 units issued and outstanding
in 1999 and 1998, respectively. . . . . . . . . . . . . . (11,459,752) (13,320,967)
--------------- --------------
(12,215,938) (14,066,411)
--------------- --------------
$ 69,388,311 $ 64,039,206
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
7
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
GENERAL LIMITED
PARTNER PARTNERS TOTAL
---------- ------------- -------------
<S> <C> <C> <C>
BALANCES, December 31, 1998 . . . . . . . . . . $(745,444) $(13,320,967) $(14,066,411)
Net loss for the period . . . . . . . . . . . (3,379) (334,556) (337,935)
Currency translation adjustments. . . . . . . (7,363) (728,890) (736,253)
Cash distributions to minority partner of HDA - (20,368) (20,368)
Issuance of Units, net of costs . . . . . . . - 2,945,029 2,945,029
---------- ------------- -------------
BALANCES, September 30, 1999. . . . . . . . . . $(756,186) $(11,459,752) $(12,215,938)
========== ============= =============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
8
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . $ (337,935) $(2,971,082)
------------ ------------
Adjustments to reconcile net loss to net cash provided
by operating activities-
Depreciation and amortization. . . . . . . . . . . . 3,226,529 3,327,482
Deferred income tax provision. . . . . . . . . . . . 42,343 -
Currency translation adjustments . . . . . . . . . . 109,673 (40,470)
Minority interest. . . . . . . . . . . . . . . . . . (705,701) (27,321)
Extraordinary item . . . . . . . . . . . . . . . . . 22,680 -
Decrease (increase) in assets-
Accounts receivable. . . . . . . . . . . . . . . . . . 279,261 (1,162,623)
Prepayments and other assets . . . . . . . . . . . . 425,443 (335,021)
Increase (decrease) in liabilities-
Accrued interest on first mortgage notes . . . . . . 1,538,610 1,919,929
Accounts payable and accrued liabilities . . . . . . (822,891) 404,498
Outstanding winning tickets and refunds. . . . . . . 1,547,512 (336,063)
------------ ------------
Total adjustments. . . . . . . . . . . . . . . . . . . 5,663,459 3,750,411
------------ ------------
Net cash provided by operating activities. . . . . . . 5,325,524 779,329
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . (8,942,056) (6,153,072)
Deferred costs . . . . . . . . . . . . . . . . . . . . (378,082) 239,864
Decrease (increase) in notes receivable, net . . . . . 565,148 (892,092)
Acquisition of ECOC cash accounts upon
termination of lease agreement . . . . . . . . . . . - 1,061,239
------------ ------------
Net cash used in investing activities. . . . . . . . . (8,754,990) (5,744,061)
------------ ------------
</TABLE>
(continues)
9
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
(continued)
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of First Mortgage Notes. . . . . . . $(3,048,320) $ -
Contributions by minority stockholders. . . . . 40,158 33,410
Repayment of loans to affiliates. . . . . . . . (200,000) -
Loans from financial institutions . . . . . . . 825,000 6,667,090
Payments on notes payable and capital
lease obligations . . . . . . . . . . . . . (1,352,206) (1,341,773)
Increase in deferred costs. . . . . . . . . . . (7,500) (18,553)
Issuance of units . . . . . . . . . . . . . . . 3,051,600 -
Cash distributions to minority
partner of HDA. . . . . . . . . . . . . . . . (20,368) -
------------ ------------
Net cash (used in) provided by
financing activities. . . . . . . . . . (711,636) 5,340,174
------------ ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS. . . . . . . . . . . . . . (4,141,102) 375,442
CASH AND CASH EQUIVALENTS, beginning of year. . . 6,637,267 507,656
------------ ------------
CASH AND CASH EQUIVALENTS, end of period. . . . . $ 2,496,165 $ 883,098
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . $ 4,527,479 $ 4,192,496
Income taxes paid . . . . . . . . . . . . . . . - 2,480
NONCASH TRANSACTIONS:
Equipment acquired through capital leases . . . 1,462,127 266,992
Acquisition of ECOC's non cash accounts upon
termination of lease agreement. . . . . . . - (4,719,572)
Contribution of Los Comuneros non cash assets,
net of liabilities (see Note 2) . . . . . . 1,959,842 -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE>
EQUUS GAMING COMPANY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
Equus Gaming Company L.P. (the "Company"), a Virginia limited partnership,
is engaged in thoroughbred racing, wagering and other gaming businesses in
Central and South America and the Caribbean. Through its subsidiaries, the
Company operates four racetracks and manages off-track betting systems in
various countries. The Company is also pursuing a license to operate a race
track in Virginia through its wholly owned subsidiary, Virginia Turf Club, Inc.
The Company has a 99% interest in Housing Development Associates S.E.
("HDA"), the owner of El Comandante Race Track ("El Comandante"), the only
licensed thoroughbred racing facility in Puerto Rico. El Comandante is operated
by a wholly-owned subsidiary of HDA, El Comandante Management Company, LLC
("ECMC"). HDA has recently organized two wholly-owned subsidiaries:
Satellites Services International, Inc. ("SSI") and Agency Betting Network, Inc.
("ABN"). SSI will provide up-link services and satellite time (contracted
from a third party) to certain race tracks (commencing with Presidente Remon)
necessary for the transmission of their races in the simulcast operations. ABN
is establishing and operating the off-track betting agency system in Colombia
for Los Comuneros Race Track in Medellin, Colombia ("Los Comuneros").
The Company has a 55% interest in Galapagos, S.A. ("Galapagos"), the
operator since April 1995 of the V Centenario Race Track in the Dominican
Republic ("V Centenario") and a 51% interest in Equus Entertainment de Panama,
S.A. ("Equus-Panama"), the operator since January 1, 1998 of the Presidente
Remon Race Track in the Republic of Panama ("Presidente Remon"). Both
racetracks are government-owned and operated by the Company's subsidiaries under
long-term contracts.
The Company also has since early 1999 a controlling 50% interest in Equus
Comuneros S.A. ("SECSA"), the owner and operator of Los Comuneros. SECSA is in
the process of negotiating certain contracts in connection with the operation of
Los Comuneros, which should be in effect during 1999. In early 1999, SECSA
received as a capital contribution from minority stockholders, all assets and
liabilities that were employed by the prior operator of Los Comuneros. The
assets consisted, mainly, of land, buildings and property for approximately $4.7
million and liabilities of approximately $2.7 million. The liabilities
included, mainly, accounts payable to vendors and horseowners and certain
financial obligations with various maturities through 2004. These obligations,
which at September 30, 1999 amounted to approximately $481,000 are recorded in
the accompanying consolidated balance sheet as accounts payable and accrued
liabilities.
CONSOLIDATION AND PRESENTATION
The consolidated financial statements as of September 30, 1999 and for the
nine and the three month periods ended September 30, 1999 and 1998 are unaudited
but include all adjustments (consisting of normal recurring adjustments) which
management considers necessary for a fair presentation of the results of
operations of the interim periods. The operating results for the nine months
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the year. Net income (loss) per Unit is calculated based on
weighted average of Units outstanding. Outstanding warrants to purchase Units
do not have a material dilutive effect on the calculation of earnings per Unit.
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
11
<PAGE>
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
("GAAP") have been condensed or omitted. While Management believes that the
disclosures presented are adequate to make the information not misleading, it is
suggested that these financial statements be read in conjunction with the
financial statements and the notes of the Company included in the Company's
Annual Report filed on Form 10-K for the year ended December 31, 1998.
The Company consolidates in its financial statements the accounts of
entities in which it has a controlling interest. The accompanying consolidated
financial statements include the accounts of the Company and its subsidiaries
after eliminating all significant inter-company transactions. All of the
entities included in the consolidated financial statements are hereinafter
referred to collectively, when practicable, as the "Company".
The Company has minority partners in HDA, Galapagos, Equus-Panama and
SECSA. Therefore, the Company recorded minority interest based on the income
and (losses) of these consolidated subsidiaries that are attributable to the
minority partners, as follows:
<TABLE>
<CAPTION>
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
--------------------- ---------------------
Subsidiary 1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
HDA. . . . . $ 21,710 $(27,231) $ (400) $(18,400)
Galapagos. . - - -
Equus-Panama (99,604) - (49,681) -
SECSA. . . . (627,807) - (224,915) -
---------- --------- ---------- ---------
$(705,701) $(27,231) $(274,996) $(18,400)
========== ========= ========== =========
</TABLE>
In general, the minority interest is calculated based on the ownership
interest of the minority partners: 1% in HDA, 45% in Galapagos, 49% in
Equus-Panama (effective October 22, 1998 after the issuance of new stock
pursuant to a public offering in Panama) and 50% in SECSA. However, during the
nine months ended September 30, 1999 and 1998, the Company did not recognize
minority interest in Galapagos' losses amounting to $275,758 and $195,500,
respectively, because the minority partners have no legal obligation to fund
such losses in excess of their investment.
On May 14, 1999, the Company issued 80,000 units to accredited investors
for $81,600 pursuant to the terms of a private offerring that commenced in
December 1998.
12
<PAGE>
NEW ACCOUNTING PRONOUNCEMENT
In September 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument
be recorded in the balance sheet as either an asset or liability measured at
its fair value. SFAS 133 requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. SFAS 133 cannot be applied retroactively. The Company will adopt SFAS
133 beginning January 1, 2001. Adoption of this statement is not expected to
have a material impact on the Company's consolidated financial position or
results of operations.
CURRENCIES
The Company consolidates its accounts with Galapagos and SECSA whose
functional currency are the Dominican Republic peso and the Colombian peso,
respectively. The United States dollars ("US$") are also a recording currency
in these countries. US$ are exchanged into these foreign currencies ("FC$") and
vice versa through commercial banks and/or the central banks. The Company
remeasures the monetary assets and liabilities of the foreign subsidiaries that
were recorded in US$ into the FC$ using the exchange rates in effect at the
balance sheet date (the "current rate") and all other assets and liabilities and
capital accounts, at the historical rates. The Company then translates the
financial statements of the foreign subsidiaries from FC$ into US$ using the
current rates, for all assets and liabilities, and the average exchange rates
prevailing during the year, for revenues and expenses.
For the nine months ended September 30, 1999 and 1998, net exchange losses
resulting from remeasurement of accounts, together with losses from foreign
currency transactions, amounted to $50,011 and $55,385, respectively, which
amounts are included as general and administrative expenses. Accumulated net
losses from changes in exchange rates due to the translation of assets and
liabilities of the foreign subsidiaries are included in partners' deficit and at
September 30, 1999 and December 31, 1998 amounted to $839,608 and $103,350
(including $35,590 at December 31, 1998 from unsettled intercompany
transactions), respectively. The exchange rates in Dominican Republic as of
September 30, 1999 and December 31, 1998 were US$1.00 to FC$16.10 and US$1.00 to
FC$15.85, respectively. The average exchange rates in Dominican Republic
prevailing during the nine months ended September 30, 1999 and 1998, were
US$1.00 to FC$16.00 and US$1.00 to FC$15.27, respectively. The exchange rate in
Colombia as of September 30, 1999 and December 31, 1998 was approximately
US$1.00 to FC$1,990 and US$1.00 to FC$1,500, respectively. The average exchange
rate in Colombia prevailing during the nine months ended September 30, 1999 was
US$1.00 to FC$1,700.
The Company also consolidates its accounts with Equus-Panama whose
functional currencies are the Panama balboas and the US$. Because these
currencies are of equivalent value, there is no effect attributed to foreign
currency transactions of Equus-Panama.
2. FIRST MORTGAGE NOTES:
Pursuant to a private offering, El Comandante Capital Corp. ("ECCC"), a
single-purpose wholly owned subsidiary of HDA, issued first mortgage notes in
the aggregate principal amount of $68 million (the "First Mortgage Notes") under
an indenture dated December 15, 1993 (the "Indenture"). The First Mortgage
Notes mature on December 15, 2003 and bear interest at 11.75%, payable
semiannually. On January 5, 1999, HDA redeemed at 110% of par First Mortgage
Notes in the principal amount of $3 million (of which $380,000 were Notes
purchased by ECMC in December 1998).
13
<PAGE>
In June 1999, the Company purchased in the open market First Mortgage Notes
in the principal amount of $189,000, at a discount. The Company intends to hold
these First Mortgage Notes until maturity in cancellation of required partial
redemptions in future years, as shown below. In connection with this
transaction, the Company recognized as income $22,680 for the discount on the
Notes, which is included in the accompanying consolidated statements of loss as
an extraordinary item.
HDA is required to redeem First Mortgage Notes commencing on December 15,
2000. The stated maturities of the First Mortgage Notes at September 30, 1999,
reduced by prior redemptions, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING GROSS PURCHASED IN NET
SEPTEMBER 30, AMOUNT OPEN MARKET AMOUNT
- - ------------------------ -------- -------------- --------
<S> <C> <C> <C>
2000. . . . . . . . . $ - $ - $ -
2001. . . . . . . . . 563 563 -
2002. . . . . . . . . 10,200 6,746 3,454
2003. . . . . . . . . 10,200 - 10,200
2004. . . . . . . . . 40,800 - 40,800
-------- -------------- --------
61,763 7,309 54,454
Less note discount (998) (65) (933)
-------- -------------- --------
$60,765 $ 7,244 $53,521
======== ============== ========
</TABLE>
As of November 12, 1999, HDA has advanced to the Company approximately
$500,000 against its allowable future distributions of profits, which
technically is not in conformity with the terms of the Indenture. HDA expects to
cure this default with the declaration of future distributions.
3. BONDS AND NOTES PAYABLE AND CAPITAL LEASES:
The Company's outstanding notes payable consist of the following:
<TABLE>
<CAPTION>
BALANCE
-------------------------
MATURITY INTEREST SEPTEMBER 30, DECEMBER 31,
BORROWER DESCRIPTION DATE RATE 1999 1998
- - ------------ ------------------ -------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ECMC . . . . Note payable (a) 1/05/00 P+1.0% $ 193,270 $ 649,100
ECMC . . . . Term loan (b) 1/05/00 P+0.75% 2,500,000 1,850,000
Equus-Panama Line of credit (c) 5/25/00 10.75% 34,362 142,697
Equus-Panama Term loan 4/25/00 10.75% 97,613 -
The Company. Loan (d) - P+1.0% - 200,000
-------------- -------------
$ 2,825,245 $ 2,841,797
============== =============
</TABLE>
At September 30, 1999 and December 31, 1998, prime rate (P) was 8.25% and
7.75%, respectively.
(a) Balance outstanding under a $750,000 line of credit, available to finance
loans to Puerto Rico horseowners for the acquisition of horses.
(b) Maximum outstanding balance is $2.5 million. Collateralized by the First
Mortgage Notes purchased in the open market (see Note 2).
(c) Maximum outstanding balance is $250,000. Available to finance loans to
Panama horseowners for the acquisition of horses.
(d) Loan made by an affiliate in 1998 and repaid in March, 1999.
14
<PAGE>
Pursuant to a public offering, Equus-Panama issued $4 million in unsecured
bonds in October 1998. Interest is payable at 11% per annum on a quarterly
basis.
The following table summarizes future minimum payments on capital leases,
notes payable and bond payable of the Company and its consolidated subsidiaries:
<TABLE>
<CAPTION>
DUE DURING THE YEAR CAPITAL NOTES BONDS
ENDING SEPTEMBER 30, LEASES PAYABLE PAYABLE
- - -------------------- ----------- ---------- ----------
<S> <C> <C> <C>
2000. . . . . . . $1,303,500 $2,825,245 $ -
2001. . . . . . . 953,151 - 600,000
2002. . . . . . . 585,764 - 1,000,000
2003. . . . . . . 440,506 - 1,200,000
2004. . . . . . . 301,146 - 1,200,000
Thereafter . . . . 8,529 - -
----------- ---------- ----------
3,592,596 2,825,245 4,000,000
Less-interest. . . (592,047) - -
----------- ---------- ----------
$3,000,549 $2,825,245 $4,000,000
=========== ========== ==========
</TABLE>
4. RELATED PARTY TRANSACTIONS:
The following represents a summary of amounts incurred for services
rendered by certain related parties, namely, Equus Management Company ("EMC"),
general partner of the Company, American Community Property Trust ("ACPT") and
Interstate General Company L.P. ("IGC"):
<TABLE>
<CAPTION>
For the Nine For the Three
Months Ended Months Ended
Services Rendered September 30, September 30,
----------------- ----------------- ----------------
To By Nature 1999 1998 1999 1998
- - ------------- ---- ----------------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
The Company ACPT Support agreement $ 24,300 $18,340 $ 8,100 $10,680
The Company EMC Directors fees 64,250 65,500 20,750 19,000
ECMC IGC Services of James
J. Wilson 101,250 - 33,750 -
The Company ACPT Rent office space 31,500 31,500 10,500 10,500
</TABLE>
5. SEGMENT INFORMATION (UNAUDITED):
The Company has identified four reportable segments, based on geographical
considerations: Puerto Rico, Dominican Republic, Colombia and Panama. The
following present the segment information for the nine and the three months
ended September 30, 1999, and 1998 (in thousands):
15
<PAGE>
<TABLE>
<CAPTION>
PUERTO DOMINICAN
RICO REPUBLIC COLOMBIA PANAMA TOTAL
-------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
1999- NINE MONTHS:
Commissions on wagering. . . . $38,796 $ 2,895 $ 1,048 $ 6,855 $49,594
Total revenues . . . . . . . . 40,617 4,027 1,204 7,087 52,935
Financial expenses . . . . . . 5,646 38 192 426 6,302
Depreciation and amortization. 1,818 307 157 423 2,705
Income (loss) before income
taxes, minority interest
and extraordinary item. . . 1,048 (613) (1,244) (203) (1,012)
Capital expenditures . . . . . 8,081 42 614 205 8,942
Total assets . . . . . . . . . 54,731 1,534 4,326 8,797 69,388
1998 - NINE MONTHS:
Commissions on wagering. . . . $35,544 $ 2,955 $ - $ 5,873 $44,372
Total revenues . . . . . . . . 37,598 4,509 - 6,021 48,129
Financial expenses . . . . . . 6,343 109 - 297 6,749
Depreciation and amortization. 2,066 408 - 315 2,790
Loss before income taxes and
minority interest . . . . . (1,421) (434) - (1,144) (2,998)
Capital expenditures . . . . . 1,545 - - 4,608 6,153
1999 - QUARTER:
Commissions on wagering. . . . $12,511 $ 913 $ 386 $ 2,429 $16,239
Total revenues . . . . . . . . 13,067 1,349 329 2,513 17,258
Financial expenses . . . . . . 1,913 10 87 145 2,155
Depreciation and amortization. 663 142 32 146 983
Loss before income taxes and
minority interest. . . . . . (221) (210) (447) (101) (979)
1998 - QUARTER:
Commissions on wagering. . . . $10,218 $ 815 $ - $ 2,165 $13,198
Total revenues . . . . . . . . 11,163 1,238 - 2,225 14,626
Financial expenses . . . . . . 2,150 47 - 103 2,300
Depreciation and amortization. 708 130 - 129 967
Income (loss) before income
taxes and minority interest (908) (314) - (576) (1,798)
</TABLE>
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- - -----------------------
The Company's results of operations are principally attributed to its
interests in thoroughbred horse race tracks in four countries, each of which is
owned and/or operated by a subsidiary: (i) El Comandante in Puerto Rico, owned
by Housing Development Associates S.E.("HDA") and operated since January 1,
1998 by El Comandante Management Company, LLC ("ECMC"), (ii) V Centenario in the
Dominican Republic, operated since April 1995 by Galapagos S.A., (iii)
Presidente Remon in Panama, operated since January 1, 1998 by Equus
Entertainment de Panama, S.A. ("Equus-Panama") and (iv) Los Comuneros in
Medellin, Colombia, owned and operated since early 1999 by Equus Comuneros, S.A.
("SECSA").
The following discussion compares the results of operations of the Company
for the nine and the three months ended September 30, 1999, with the results of
operations for the nine and the three months ended September 30, 1998.
REVENUES
Revenues increased in the third quarter of 1999 by $2,632,000 (18%,
including $329,000 of revenues earned by SECSA) compared to the third quarter of
1998 due principally to increase in wagering commissions. During the nine
months ended September 30, 1999, revenues increased $4,805,000 (10%, including
$1,204,000 of revenues earned by SECSA) from the comparative period of 1998 due
principally to increase in wagering commissions.
COMMISSIONS ON WAGERING
Commissions on wagering increased $3,041,000 (23%) in the third quarter of
1999 as compared to the third quarter of 1998. During the nine months ended
September 30, 1999, commissions on wagering increased by $5,222,000 (11.8%) from
the comparative period of 1998. The increase in commissions during the three
and the nine-month periods was attributed in part to commissions earned by SECSA
on races held at Los Comuneros of approximately $386,000 and $1,048,000,
respectively. Live racing at Los Comuneros has been conducted only one day per
week while the off-track betting ("OTB") operation is being upgraded and the
racetrack improved.
During the three and the nine month periods, commissions on wagering at El
Comandante increased by $2,293,000 and $3,252,000, respectively. The increase
in wagering during the nine-month period was mainly due to the fact that races
are being held on Saturdays instead of Thursday since November 14, 1998, when
races resumed after Hurricane Georges. The third quarter of 1998 was
particularly affected by Hurricane Georges which caused significant damage
island wide in Puerto Rico forcing suspension of racing operations from
September 20 until November 14, 1998 (eight racing dates in the third quarter
were cancelled). The Hurricane caused significant damage to the racetrack and
Puerto Rico's electrical and telecommunications infrastructure, interrupting the
live racing operations and resulting in an increase in wagering during the third
quarter of 1999, when compared to the third quarter of 1998.
During the three and the nine-month periods, commissions on wagering at
Presidente Remon increased by $264,000 and $982,000, respectively. The increase
in wagering was directly related to more OTB agencies on line, and more race
days during the 1999 periods (live racing commenced on February 14, 1998 with
two race days per week, increasing to three days in April 1998).
Wagering at V Centenario has remained at the same level, attributable in
part to the competition posed by the government-licensed electronic lottery and
to technical difficulties in arranging for live broadcasting of races by
commercial television with broad island-wide penetration.
17
<PAGE>
NET REVENUES FROM LOTTERY SERVICES
Net revenues from lottery services by Galapagos in Dominican Republic
during the third quarter of 1999 increased by $66,000 while revenues for the
nine months period decreased by $290,000, from the comparative periods of 1998.
The decrease in revenues during the nine month period was principally due to a
reduction in the amount billed to the lottery operator as reimbursement for the
telephone line costs, as a result of an amendment to the contract effective in
late 1998.
OTHER REVENUES
During the three and the nine-month periods, other revenues decreased
$475,000 and $127,000, respectively, from the comparative periods of 1998. This
decrease was principally attributed to an income of $500,000 recognized in the
third quarter of 1998 from the business interruption claim filed in connection
with damage caused by Hurricane Georges.
EXPENSES
Expenses increased in the third quarter of 1999 by $1,813,000 (11%)
compared to the third quarter of 1998. During the nine months ended September
30, 1999, expenses increased $2,819,000 from the comparative period of 1998. The
increase in each of the three and the nine-month periods was attributable
partially to approximately $775,000 and $2,447,000, respectively, to expenses
of SECSA, net of decreases in various categories of expenses of the other
racetracks.
PAYMENTS TO HORSEOWNERS
Payments to horseowners increased $1,293,000 in the third quarter of 1999,
as compared to the third quarter of 1998. During the nine months ended
September 30, 1999 these payments increased by $2,505,000 from the comparative
period of 1998. Excluding payments to horseowners of Los Comuneros, there was
an increase during the three and the nine months periods of $1,118,000 and
$1,891,000, respectively, which was principally related to net increases in
wagering.
El Comandante contract expired in April 1998. However, the Puerto Rico
Racing Board has extended the contract as an interim measure until the Company
and the horseowners reach a new agreement. The Company is presently under
negotiations with horseowners.
FINANCIAL EXPENSES
Financial expenses during the three and the nine months periods ended
September 30, 1999 decreased $145,000 and $447,000, respectively, from the
comparative periods of 1998. Excluding financial expenses of SECSA, there was a
decrease during the three and the nine months periods of $232,000 and $639,000,
respectively. The decrease is primarily attributable to a reduction in
financing costs of the First Mortgage Notes, due to the purchase in December
1998 by ECMC of $7.5 million in principal amount of Notes (treated in the
consolidated financial statements of the Company as a redemption) and the
redemption in January 5, 1999 of $3 million in principal amount of Notes. The
decrease was offset in part by an increase due to interest on the $4 million in
unsecured bonds issued by Equus-Panama in October 1998.
DEPRECIATION AND AMORTIZATION
Depreciation in the third quarter of 1999 remained at the same level as the
comparative quarter of 1998. During the nine months ended September 30, 1999,
depreciation decreased $85,000 from the comparative period of 1998. Excluding
depreciation and amortization of SECSA, there was a decrease during the three
and the nine-month periods of $16,000 and $242,000, respectively. The decrease
was principally attributed to a reduction in depreciation of assets of El
Comandante due to the write-off of the book value of property damaged by
Hurricane Georges in late 1998. Property at the racetrack is being replaced and
depreciation on new property should commence in the fourth quarter of 1999,
when all capital improvement projects are expected to be completed.
18
<PAGE>
OTHER EXPENSES
Other expenses increased $649,000 to $7,159,000 in the third quarter of
1999 from $6,510,000 in the third quarter of 1998. During the nine months ended
September 30, 1999, other expenses increased $846,000 to $20,574,000 from
$19,728,000 in the comparative period of 1998. Excluding the expenses of SECSA
during the three and the nine months ended September 30, 1999 of $481,000 and
$1,484,000, respectively, there was an increase in other expenses during the
third quarter of $168,000 and a decrease of $638,000, respectively. The net
increase during the quarter of 1998 was attributable to a combination of
factors: (i) decrease in salaries and payroll costs of El Comandante due to
reduction of personnel in various departments because of partial closing of
several areas at the race track (such as mutuels department and print shop),
(ii) increase in marketing costs due to a strong advertising and promotion
campaign in Puerto Rico, (iii) increase in insurance premiums after heavy damage
caused by Hurricane Georges and (iv) increase in legal fees due to current
negotiations by El Comandante of the contract with horseowners, which expired in
April, 1998.
PROVISION FOR INCOME TAXES
The provision for income tax is primarily related to Puerto Rico income
taxes on the Company's income related to its interest in El Comandante, without
taking into account results of operations of Galapagos, Equus-Panama or SECSA.
Due to accumulated losses, none of these foreign subsidiaries requires a
provision for income taxes.
MINORITY INTEREST
The Company's minority interest is attributed to the income and losses
allocable to the minority partners of HDA, Galapagos, Equus-Panama (effective
October, 1998) and SECSA (effective January, 1999). Because accumulated losses
of Galapagos allocable to minority partners had exceeded their investment,
during the nine months ended September 30, 1999 and 1998, the Company did not
recognize minority interest in losses of Galapagos of $275,758 and $195,500,
respectively.
EXTRAORDINARY ITEM
The extraordinary item recorded during the nine months ended September 30,
1999 represents the discount on the purchase in the open market in June 1999 of
$189,000 of First Mortgage Notes.
LIQUIDITY AND CAPITAL RESOURCES
- - ----------------------------------
OVERVIEW
The principal source of cash of Equus Gaming Company L.P. (the "Company"
or, when referred to the individual entity, "Equus") has been distributions
related to its ownership interest in HDA, the owner and operator (through its
wholly owned subsidiary, ECMC) of El Comandante race track in Puerto Rico. Due
to certain restrictions under HDA's indenture for the issuance of its 11.75%
First Mortgage Notes due 2003 (the "Indenture"), cash held by HDA or its
consolidated subsidiaries (including ECMC) is not readily available to Equus.
Therefore, capital resources and liquidity of Equus are discussed separately,
excluding the cash flows and operations of (i) HDA and (ii) Equus' other foreign
subsidiaries. A separate discussion of the capital resources and liquidity of
HDA (including ECMC) is also presented.
19
<PAGE>
Because the liquidity and capital resources discussion is not presented on
a consolidated basis, some of the discussion relates to transactions that are
eliminated in the Company's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES OF EQUUS
Cash and cash equivalents of Equus increased by $2,000 during the nine
months ended September 30, 1999. Equus's liquidity mainly depends on (i)
advances and cash distributions from HDA and (ii) cash flow from operations,
attributable to agreements that Equus has (through its wholly-owned subsidiary,
EEC) to provide management services and technical assistance in the operation of
the race tracks operated by Equus' subsidiaries in Puerto Rico, Dominican
Republic, Panama, and, Colombia.
During 1999 the Company issued 2,991,764 units pursuant to the terms of a
private offering for $3,051,600 to accredited investors, principally The Wilson
Family Limited Partnership, a major unitholder of the Company. Proceeds from
the private offering were used by Equus to (i) purchase HDA's 37.5% interest in
Equus-Panama (including a receivable) and HDA's 55% interest in Galapagos
(including a receivable) for an aggregate price of $1.85 million, (ii) repay a
$200,000 short-term loan from an affiliate, and (iii) invest funds in Los
Comuneros, principally during its start-up period and for certain improvements
to the race track.
During the nine months ended September 30, 1999, the Company has also
incurred approximately $200,000 of costs in relation to an application by its
wholly-owned subsidiary, Virginia Turf Club, Inc. ("VTC"), for licenses to own
and operate a horse race track in Prince William County, Virginia (the "Virginia
License"). These costs are mainly for professional services and include options
to purchase a piece of land. On November 17, 1999 the Virginia Racing
Commission will make a final decision on the application to award the Virginia
License.
For the quarter ending December 31, 1999, Equus expects to make additional
investments in Los Comuneros and incur additional cost in connection with the
application of the Virginia Licenses.
LIQUIDITY AND CAPITAL RESOURCES OF HDA (AND ITS CONSOLIDATED SUBSIDIARIES)
Cash and cash equivalents of HDA and its consolidated subsidiaries
decreased by $4.6 million during the nine months ended September 30, 1999 to
$1.9 million. HDA has historically met its liquidity requirements principally
from cash flow generated by (i) the operations of El Comandante racetrack in
Puerto Rico and (ii) short-term loans and capital leases for acquisition of new
equipment.
The principal uses of cash of HDA and its consolidated subsidiaries for
its financing and investing activities during the nine months ended September
30, 1999 were as follows:
(i) Capital improvements to El Comandante race track of $6.8 million (of the
$12 million budget), principally incurred to replace property damaged by
Hurricane Georges in September 1998 (in November 1998 HDA received
insurance compensation of approximately $11 million for property damage).
(ii) Payments on capital leases for equipment used in El Comandante operations.
(iii)Redemption on January 5, 1999 of First Mortgage Notes in the principal
amount of $3 million at 110% of par and the purchase in September 1999 in
the open market of First Mortgage Notes in the principal amount of $189,000
for $166,000. The net cost of these transactions was $3,048,320.
(iv) Cash distributions to Equus of $1,670,200, based on consolidated income
generated by HDA through September 30, 1999. HDA's distributions to
partners, including Equus, are based on a percentage of HDA's consolidated
book income (calculated on a cumulative basis since January 1, 1994). As of
Novemeber 12, 1999, HAD has advanced to Equus approximately $500,000
against its allowable future distribution of profits, which technically is
not in conformity with the terms of the Indenture.
(v) Investment of approximately $640,000 in a new wholly-owned subsidiary named
Agency Betting Network, Inc ("ABN"), created for the purpose of
establishing and operating the off-track betting agency system in Colombia
for Los Comuneros race track.
20
<PAGE>
In addition to cash available to HDA at the beginning of the year of $6.5
million and cash flows provided by operations during the nine months ended
September 30, 1999, HDA obtained additional funds for its financing and
investing transactions (as described above) principally from $650,000 in
advances drawn under a $2.5 million line of credit and the sale to Equus of
HDA's interest in Equus-Panama (including a receivable) and Galapagos (including
a receivable) for an aggregate price of $1.85 million. During the period, HDA
also obtained capital leases to purchase equipment for El Comandante operations
and certain equipment for the operations of a new wholly-owned subsidiary named
Satellites Services International, Inc. ("SSI"). The equipment of SSI consists
of an up-link earth station located in Panama, necessary to carry races via
satellite in simulcast operations. SSI's will also provide the satellite time
(contracted from a third party) and charge a fee for the transmission of races
in the simulcast operations.
For the quarter ending December 31, 1999, the projected principal uses of
cash for the financing and investing activities of HDA and its consolidated
subsidiaries are: (i) capital improvements to continue the reconstruction of El
Comandante race track from damage caused by Hurricane Georges of approximately
$1.7 million, (ii) principal payments on capital leases for operations of El
Comandante and SSI, and (iii) cash distributions to partners.
From the $11 million of insurance proceeds received in November 1998 for
property damage, ECMC used approximately $6.5 million to purchase $7.5 million
(face value) of the 11.75% First Mortgage Notes of El Comandante. HDA has
requested from a financial institution a $5.5 million credit facility (including
the $2.5 originally borrowed against the ECMC's Notes), to recover part of the
funds used to purchase ECMC's Notes. These funds are needed to complete
capital improvements to El Comandante by the end of the year and to meet other
obligations of HDA. Management expects a decision from the financial
institution by the end of November.
LONG-TERM COMMITMENTS. In addition to capital leases, long-term cash
commitments of HDA and ECMC are certain charitable contributions and repayment
of First Mortgage Notes.
In connection with the termination of the lease agreement of El Comandante
effective January 1, 1998, HDA assumed commitments to make contributions to
certain charitable and educational institutions. Amounts due under these
commitments are: $150,000 in 2000 and $200,000 in 2001. Management expects to
satisfy these obligations.
HDA's First Mortgage Notes bear interest at 11.75%, payable semiannually on
September15 and December 15, and are secured by El Comandante assets. The First
Mortgage Notes are redeemable, at the option of HDA, at redemption prices
(expressed as percentages of principal amount): if redeemed during the 12-month
period beginning December 15 of years 1998 at 104.125%, 1999 at 102.75%, 2000 at
101.5%, and 2001 and thereafter at 100% of principal amount, in each case
together with accrued and unpaid interest. The stated maturity dates of First
Mortgage Notes, as reduced by prior redemptions made by HDA and by the Notes
purchased by ECMC in December 1998 in the open market, are as follows:
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDING NET AMOUNT
SEPTEMBER 30, (FACE VALUE)
- - ------------- -------------
<S> <C>
2002. . . . . $ 3,454
2003. . . . . 10,200
2004. . . . . 40,800
-------------
$ 54,454
=============
</TABLE>
To the extent First Mortgage Notes are not previously acquired, Management
expects to refinance this obligation not later than December 2002.
GOVERNMENT MATTERS. El Comandante's horse racing and pari-mutuel wagering
operations are subject to substantial government regulation. Pursuant to the
Puerto Rico Horse Racing Industry and Sport Act (the "Racing Act"), the Racing
Board and the Puerto Rico Racing Administrator (the "Racing Administrator")
exercises regulatory control over ECOC's racing and wagering operations. For
example, the Racing Administrator determines the monthly racing program for El
Comandante and approves the number of annual race days in excess of the
statutory minimum of 180. The Racing Act also apportions payments of monies
wagered that would be available as commissions to ECMC. The Racing Board
consists of nine persons appointed to four-year terms by the Governor of Puerto
Rico. The Governor also appoints the Racing Administrator for a four-year term.
YEAR 2000 COMPUTER ISSUE
WHAT IS YEAR 2000. The Year 2000 ("Y2K") issue is the result of many
computer systems and applications and other electronically controlled systems
and equipment using two-digit fields rather than four to designate a year. As
the century date occurs, date sensitive systems with this deficiency may
recognize the year 2000 as year 1900 or not at all. This inability to recognize
or properly treat the year 2000 can cause the system to process critical
financial information and operations information incorrectly, disrupting the
normal business activities of companies.
The Company has assessed and continues to assess the impact of the Y2K issue on
its reporting systems and operations.
STATE OF READINESS. The systems and applications that can affect the
Company's operations due to Y2K issue are its financial reporting systems and
the wagering system. The administrative applications (word processing,
spreadsheet) and software financial applications utilized by the Company have
been certified by the various publishers to be Y2K compliant.
The hardware component of the Company's financial systems consists of
industry standard PC operating systems, servers, desktop computers and
networking hardware. The systems have been evaluated and the Company has
determined that some of its subsidiaries will be required to modify or replace
significant portions of its hardware and software so that its computer systems
will properly utilize dates beyond December 31, 1999.
THIRD PARTY IMPACT ON OPERATIONS. The Company utilizes software and
related computer technologies essential to the wagering operations and the
off-tack betting system of its race tracks, which is provided by an outside
firm. This firm has confirmed that its equipment and software are Y2K
compatible. The Company also utilizes certain telecommunication systems for the
transmission of data between the race tracks and its off-track betting agencies.
The Company continues formal communications with all of its significant
suppliers to determine the extent to which the Company is vulnerable to those
third parties failure to remediate their own Y2K issue.
22
<PAGE>
COSTS TO ACHIEVE Y2K COMPLIANCE. The Company has estimated total cost of
the Y2K project in less than $100,000 for acquisition of equipment and systems
upgrades. These costs are being funded through operating cash flows at each
race track, mostly attributable to the acquisition of equipment, are being
capitalized. The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors.
RISKS OF Y2K ISSUE. The failure of the Company's financial systems and
accounting operations will affect the Company's reporting functions. However,
these functions are not considered detrimental to the Company's operations. The
failure of the wagering computer system and software, provided by an outside
firm, will not allow the racetracks to process wagering or take bets through its
off-track betting system, resulting in the loss of revenues. This risk would
seriously affect the financial condition of the Company.
CONTINGENCY PLANS. The Company is evaluating various alternative scenarios
in order to complete prior to the end of the year a contingent operational work
plan to continue business operations beyond 1999. Said plan will attempt to
achieve, mainly, the continuance of the wagering operations of the racetracks.
FORWARD-LOOKING STATEMENT
Certain matters discussed and statements made within this Form 10-K are
forward-looking statements within the meaning of the Private Litigation Reform
Act of 1995 and as such may involve known and unknown risks, uncertainties, and
other factors that may cause the actual results, performance or achievements of
the Company to be different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Although the Company
believes the expectations reflected in such forward-looking statements are based
on reasonable assumptions, it can give no assurance that its expectations will
be attained. These risks are detailed from time to time in the Company's filing
within the Securities and Exchange Commission or other public statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to the impact of interest rate changes. Such
exposure to market risk is inherent in certain of the Company's financial
instruments which arise from transactions entered into in the normal course of
business. The Company is subject to interest rate risk on its outstanding note
payable and any future financing requirements. The Company's fixed rate
indebtedness consists of certain capital lease obligations requiring monthly
payments of principal and interest with terms maturing through 2005, the First
Mortgage Notes and certain bonds payable by a subsidiary of the Company.
PART II - OTHER INFORMATION
Items 1-6 None
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EQUUS GAMING COMPANY L.P.
----------------------------
(Registrant)
By: Equus Management Company
----------------------------
Managing General Partner
November 12, 1999 /s/ Thomas B. Wilson
- - ------------------- ----------------------------
Date Thomas B. Wilson
President and Chief Executive Officer
November 12, 1999 /s/ Gretchen Gronau
- - ------------------- ----------------------------
Date Gretchen Gronau
Vice President and Chief Financial Officer
24
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2496 <F1>
<SECURITIES> 0
<RECEIVABLES> 2194 <F2>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 75937
<DEPRECIATION> 17525
<TOTAL-ASSETS> 69388
<CURRENT-LIABILITIES> 0
<BONDS> 55377 <F3>
0
0
<COMMON> 0
<OTHER-SE> (12216)
<TOTAL-LIABILITY-AND-EQUITY> 69388
<SALES> 0
<TOTAL-REVENUES> 52935
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 47645 <F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6302
<INCOME-PRETAX> (1012)
<INCOME-TAX> 54
<INCOME-CONTINUING> (361) <F5>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (338)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
<FN>
<F1> Includes restricted cash of 1,399,000.
<F2> Includes notes receivable of $1.1 million.
<F3> Net of bond discount of $933,000.
<F4> Excluding financial expenses, disclosed below.
<F5> Net of minority interests in losses of $705,700.
</TABLE>
